Small Business: Learn tax tricks of travel expenses
Business travel expenses are one of the most common small biz deductions -- and among the trickiest to navigate.
There are strict rules on what you can and can't deduct, and businesses need to be prepared to defend their expenditures if they undergo an audit.
Because of the potential for abuse, "this is a fertile area for the IRS to pursue," says Barbara Weltman, a Vero Beach, Fla.-based small-business tax specialist and author of "J.K. Lasser's Small Business Taxes 2014" (Wiley; $22.95).
Businesses often claim deductions they're not entitled to, such as a 100 percent deduction on meals instead of the generally allowable 50 percent, says Weltman.
There is conflict even among tax professionals on how to handle different travel-related expenses, notes Eva Rosenberg, author of "Small Business Taxes Made Easy" (McGraw-Hill; $19) and publisher of Northridge, Calif.-based TaxMama.com, a free online tax resource.
"Some tax professionals are extremely conservative, and others are extremely aggressive," she notes.
The ones that are aggressive have a higher risk of being audited, but this doesn't mean that they'll lose the audit if they keep good records, says Rosenberg, noting she's never lost a case on those kinds of expenses.
The key is that travel must have a business purpose that takes you away from home typically overnight, says Weltman.
If the entire trip is for business, airfare and lodging are 100 percent deductible, she says. If a portion of the trip is for pleasure, special rules determine whether travel costs are deductible.
Also, if you're bringing family members, their expenses aren't deductible unless they are there strictly for business reasons, says Rosenberg.
"You want to stay within the law," adds Weltman, noting that the 50 percent deduction for meals also applies to most business-related entertainment costs.
It's critical to keep good records and not just the receipts, says Sandra Johnson, president of Sandra G. Johnson, CPA in Bellmore and executive vice president of the National Conference of CPA Practitioners.
"Keep a written travel log," advises Johnson.
It should include such details as what business purpose you were traveling or dining for, whom you met, and what was discussed, she notes.
"Everyone uses credit cards," says Tim McHale, a tax partner at Cerini & Associates LLP, a CPA firm in Bohemia. "I write across the credit card receipt the purpose of the meeting and with whom." At the end of the quarter, he summarizes them.
If you attend an event, keep the meeting agenda, program or ticket, he notes.
When it comes to deducting entertainment expenses such as taking clients to a ballgames, the IRS will look to see if it was personal or if there was a true business purpose, McHale notes. It will also look at whether businesses are lumping entertainment expenses with travel, to claim a 100 percent deduction rather than the 50 percent allowable for most entertainment, he says.
The IRS is also on the lookout for lavish entertainment expenses, says Johnson. This can be a gray area, but, for instance, if a meal expense is overboard based on the type of business you're in and your lifestyle, it could fall under scrutiny, she notes.
"What's lavish to the CEO of GE is different than what's lavish to me," notes Weltman.
And make sure you're tracking all travel-related expenses, not just the obvious ones, says Johnson. Apps such as Falcon Expenses can help.
"Find a painless way to track everything," says Rosenberg.